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Fixed costs are cost that will remain same in total regardless of changes in activity level.
Fixed cost does not fluctuate with changes in the level of activity. Since fixed cost does not
change with the level of activity, as volume increases, unit cost declines
Variable costs are cost that will change in direct proposition to the changes in the level of
activity. Variable cost per unit does not change and it will remain constant at any level of
activity. When there is no activity the variable cost will be zero unlike the fixed cost
In the given scenario the costs are classified according to its behavior and nature as illustrated
below
Electricity cost per unit of production, Telephone cost per unit of production and Labor cost per
unit of production: These costs will be considered as direct expense of producing a fish product
as this is directly identifiable costs with the unit produced. Further these costs will directly or
proportionately will increase as the activity level increase, therefore these will be considered
as variable costs.
Rent expense per month: This is considered to be indirect expense or production over head as
this cannot be directly identifiable with the unit produced. This is a fixed cost as this cost will
remain constant and does not vary according to the activity level.
Total Cost
Total cost (TC) = Fixed Cost (FC) + (Variable cost per Unit (VC) X No of unit produced).
According to the scenario the total cost per unit will be calculated as below
Description MRF
Electricity cost per unit of production 15
Telephone cost per unit of production 20
Labor cost per unit of production 80
Total Variable Cost 115
Total Fixed Cost 20000
Total Unit Cost 20115
Assumed if the company produced 1000 units of fish production the total cost of the
production will be calculated as
TC = 20,000 + 115,000
Therefore TC = 135,000
If the company produces 1000 units, the production cost as estimated as MRF 135,000
Breakeven point
Break-even point is the volume of sales required in a period to break eve and make neither a
profit nor a loss. Management might wanted to know what the break-even of a project for
following reasons
Therefore break-even point could be considered as where profit will be zero. If the profit is
MRF 0, total contribution is exactly equals to total fixed cost
Contribution = MRF 25
Break-even calculated as
Profit/Loss 0
Break-even analysis does the following assumption when calculating break-even point
Break-even diagram
This is call breakeven chart and it clearly describes the relationship of total cost and total
sales revenue and the point both total cost and total sales revenue meets called breakeven
point. Further all the other costs are clearly defined as fixed cost and variable cost.
Contribution Diagram
The main difference between breakeven chart and contribution chart is breakeven chart uses
fixed cost line to define the variable cost, but contribution chart uses variable cost line to
define the fixed cost.
The common feature of both the diagram is that both the diagrams use total sales revenue line
and total cost line to determine the breakeven point.
Both the diagram clearly defines that total variable cost and total sales revenue starts with
zero point as there will be no cost or revenue incur at zero level activity and cost and the
revenue start change directly or proportionately in response to the change of level of activity.
Whereas fixed cost line stay constant regardless of change of activity. Total cost line starts at
the point of fixed cost as this is the combination of variable cost and fixed cost. The point
where total cost and total sales revenue meets called breakeven point, where company makes
no profit and no sales.
3. Expectation of Consumers
Customers expectation on price directly impacts the demand of the product. If the
consumer feels that future price of the product will drop they will wait for a future
date to purchase it as a result it will impact the current demand. If the prices are
expected to rise in the future, consumer will start purchase now as a result it will
impact the current demand of the product. Car, house, gold and etc. are good example
for such demands.
4. Change in Population
As population increase the demand too increases as well because the needs of the
population should be met, for example education, housing, medical and etc. However
this needs change over the time as segment of population change over the age as their
needs also change.
5. Advertisement
Advertisement has a great influence over the consumer to create the demand of the
product. The purpose of the advertisement is to create a favorable influence over the
consumer to increase the demand for the product. When advertisement is success, it
will increase the demand of the product.